Global equity markets consolidated this week amidst mixed economic and earnings news flow.The MSCI
AC World index gained 0.3% helped by select Emerging markets (EM) and a bounce back in technology
stocks. Global benchmark treasury bond yields closed slightly higher as economic data out of major
developed economies was positive, weakening the case for further or continued stimulus. Sluggish growth
data out of China weighed on commodities and the Reuters Jefferies CRB Index closed down 2.22%. In
currency markets, the US dollar weakened amidst speculation that Federal Reserve might not undertake
stimulus unwind, as economic data remains mixed. An election win for the ruling coalition and rise in
inflation helped the Japanese yen gain.The G20 agreed to reform cross-border tax rules and treaties to curb
tax evasion by multi-national corporates.
• Asia-Pacific: Regional equity markets outperformed global counterparts helped by sharp gains in Greater
China and South Korean equities. Markets in China and Hong Kong were boosted by policy support for
growth – government unveiled measures that reduce tax burden on small-and-medium enterprises and taxes
on exports. China’s HSBC Flash manufacturing PMI fell to 47.7 in July from 48.2 in June mainly due to
decline in new orders.The Nikkei declined as the rise in Japanese yen offset gains from positive political news
and better economic data. Inflation rose for the fourth month in a row and trade deficit narrowed. The
incumbent coalition Liberal Democratic Party won a majority in the Japan’s upper house elections. South
Korea’s economy expanded by 1.1% qoq (sa) in Q2 helped by a recovery in private consumption and strong
government spending. Central bank of Philippines maintained status quo on rates.
• Europe: Key European indices exhibited divergent trends amidst mixed corporate results for the quarter.
Euro area flash composite PMI inched back above the key 50 level reinforcing hopes the region’s economy
is on the path to recovery. French INSEE consumer confidence index and German IFO business climate
index also showed improvement. Preliminary estimates of UK’s economy showed the country’s economy
grew by 0.6%qoq. A new government took office in Portugal bringing an end to political uncertainty.
Hungary lowered benchmark policy rate by 25bps to 4.00%, while the Turkey raised the upper end of the
short-term interest rate corridor by 75bps to 7.25%. On the corporate front,Telefonica said it is in talks
to buy KPN’s German unit for €5 bln andVivendi announced sale of its stake in Activision Blizzard.
• Americas: US equity indices were range-bound as select corporate earnings disappointed while
economic data was largely positive. Nasdaq index fared better on the back of a rebound in tech stock
prices. Weakness in commodity prices weighed on Canadian stocks. The US preliminary ISM
manufacturing index rose from 51.9 in June to 53.2 in July and sale of new houses picked up 8.3%mom
in June. US consumer confidence moved up to multi-year highs and durable goods order index was
bolstered by demand for aircrafts.Elsewhere in the region,Canada reported solid increase in domestic retail
sales and Mexico central bank left rates unchanged. On the M&A front, Michael Dell and Silver Lake
Partners raised their offer by 10 cents to $13.75/share andYahoo said it will buyback majority of the shares
held by hedge fund Third Point for $1.2 bln.
WEEK ENDED JULY 26, 2013
change (%) change (%)
MSCI AC World Index 0.29 Xetra DAX -1.04
FTSE Eurotop 100 -0.33 CAC 40 1.11
MSCI AC Asia Pacific 0.39 FTSE 100 -1.14
Dow Jones 0.10 Hang Seng 2.84
Nasdaq 0.71 Nikkei -3.15
S&P 500 -0.03 KOSPI 2.11
India - Equity
Concerns about the impact of the latest RBI measures along with FII outflows led Indian markets lower
this week, even as most EM indices registered gains. Mid and small caps underperformed large caps.
Capital goods, metal and banking stocks lost ground, while IT stocks gained on hopes the rupee
depreciation and stronger growth trends in developed economies will boost earnings. On the corporate
front,TCS acquired French company Alti for Rs. 530 crore.
• Macro/Policy: The government conferred additional powers on SEBI to enable better market oversight
and enforcement.Telecom Regulatory Authority of India kicked off a consultation process for spectrum
auction process and pricing. This is a positive change from the previous stand and a similar pragmatic
approach to policy could ease some of the issues facing the telecom industry.
Policy makers remained focused on tackling current account and rupee related issues – this week the RBI
removed the earlier financial restrictions placed on importing gold against credit and instead mandated
that entities (including banks) importing gold utilize at least one fifth of the consignment for export
purposes. India’s gold, gems & jewelry exports amounted to about 12% of total gold imports in FY13.
With the RBI mandating an increase to 20%, there could be a supply shortfall in domestic markets or fall
in imports. RBI’s latest measures to tighten systemic liquidity as part of its efforts to support the rupee
will weigh on growth if maintained for an extended period of time.The growth concerns are reflected
in the economic growth downgrades for India.
This is happening amidst similar slowdown in most Emerging Market economies – Asia along with China
are witnessing continued moderation and many countries are looking to defend their currencies. A
combination of factors including re-balancing, fall in savings rate, strong dollar and rising real rates have
contributed to the slowdown across regional economies. As we have shared earlier, notwithstanding the
near term risks in terms of the strong dollar and growth uncertainty in these countries, the medium to
long term prospects remain positive mainly due to the strong fundamentals. Whilst growth rates could
slow down further, they remain well ahead of other EM countries and especially the developed world.
Weekly change (%)
S&P BSE Sensex -1.99
CNX Nifty -2.37
CNX 500 -2.71
CNX Midcap -3.88
S&P BSE Smallcap -3.33
India - Debt
Bond markets extended declines as fresh RBI measures tightened systemic liquidity further and raised
concerns about monetary policy direction going forward.
• Yield Movements: RBI announcement sparked a sharp surge in yields at the shorter end of the
curve and caused the yield curve to invert further.Yields on the 1- and 5-year papers jumped 112
bps and 34 bps respectively, while those on the 10-year paper increased 22 bps to 8.13%.Yields on
the 5-year AAA corporate bonds also rose by a similar quantum.
Source: Bloomberg, CLSA
• Liquidity/borrowings: Overnight call money rates surged to close at near 10%, reflecting the impact
from the liquidity tightening.Apart from the changes to LAF/CRR balance management, the central bank
drained liquidity to the tune of Rs. 6000 crores through auction of cash management bills.
• Forex: Fresh measures from the central bank and dollar weakness helped the currency extend gains and
close up 0.52% against the greenback.As of Jul 19, 2013, India’s forex reserves stood at $279 bln, about $1
bln less than previous week levels.
• Macro/Policy: The RBI announced further policy changes to reduce rupee liquidity.The measures need
to be seen in the context of the limited impact last week’s policy changes had on the rupee and systemic
liquidity. As per new measures
• Banks can borrow up to 0.5% of their net demand and time liabilities (NDTL), as against 1% earlier.
The measure is expected to reduce borrowing under LAF to about Rs. 37,500 crs from Rs. 75,000 crs
• Banks need to maintain a minimum daily balance of 99% of the cash reserve requirement, as opposed
to the earlier system of maintaining 70% of the required CRR on a daily basis
The RBI is set to hold the Q1 review of monetary policy mid-next week. Next steps would depend on
the effectiveness of above measures to reduce INR volatility. Measures aside, markets will keenly watch the
central bank’s policy tone/language to gain an insight into the length of time these measures will stay in
place and its reading of other macro-economic data.